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Long Combo
Long Combo Option Trading Strategy is implemented when a trader is
bullish in nature and expects the stock price to rise in the near future. Here
a trader will sell one ‘Out of the Money’ Put Option and buy one ‘Out of the
Money’ Call Option. This trade will require less capital to implement since the
amount required to buy the call will be covered by the amount received from
selling the put.
A long Combo strategy is a Bullish Trading Strategy employed when a
trader is expecting the price of a stock, he is holding to move up. It involves
selling an OTM Put and buying an OTM Call. The strategy requires less capital
as the cost of Call Option is covered by premium received from Put Option.
Long Combo strategy should be deployed when you're Bullish on an underlying
but don't have the required capital or the risk appetite to invest directly
into it.
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This is a fairly complex options strategy. It requires
that the trader knows how options move with the underlying, and more
importantly, how selling out of the money (OTM) put options and buying out of
the money (OTM) call options can have an impact on the trade.
The secret to a successful trade is to ensure that the timing of the
trades is done in tandem and that the correct strike prices are chosen. It is
important to note that the risk is unlimited since you are selling a OTM Put
option (anytime you sell a put option your risk is unlimited).
The strategy can work out very well. As the stock price of the underlying
rises the strategy starts making profits as both the OTM Call and the OTM Put
generate profits together.
Breakeven Point is Call Strike + Net Premium
Reward Unlimited
profit
Risk Unlimited
loss (Lower Strike + Net Premium)
Action
Sell ‘Out of the Money’ Put Option
Buy ‘Out of the Money’ Call Option
Example
NIFTY is trading at 11500 levels, Mr. G wants to enter in a long combo
strategy. He will sell one 11300 OTM Put Option for a premium of Rs. 80 &
buy one 11700 OTM Call Option for a premium of Rs. 100. The lot size of NIFTY
is 75.
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Breakeven Point Breakeven Point is 11720 (11700+20).
Image by - sensibull.com
Result 1: At expiry if NIFTY closes at 11100, then Mr.
G will incur a loss of Rs. 16,500.
Image by - sensibull.com
Result 2: At expiry if NIFTY closes at 11400, then Mr.
G will make a loss of Rs. 1,500.
Image by - sensibull.com
Result 3: At expiry if
NIFTY closes at 11900, then Mr. G will make a profit of Rs. 13,500.
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